And then it happens – a small business has trouble paying back their Merchant Cash Advance's terms or payment frequency and they are in danger of (or actually) being sued by the MCA company. Yet, in most cases what can happen to the small business owner has already most likely put in motion weeks or months before the client was in default. These things are unfair but they are listed in the MCA agreement. In some cases they are in fine print, and in some case not. This article highlights some of those things which MCA companies list in their agreements which small business owners should consider, especially when they are defaulting on their Agreements.
By Thomas Tramaglini, Chief Operations Officer
Watch out! MCA Agreements Contain Things That Are CRAZY and UNREASONABLE
When a Merchant Cash Advance company does not get paid back, watch out. The MCA company will use many different actions to get you to pay back your MCA. However, most of what is in their playbook is already in your Merchant Cash Advance agreement and as a condition of receiving the advance of future receivables, small business owners are forced to sign off on terms and conditions which are crazy and unreasonable.
Beacon Client Solutions works with many small business owners to address MCA issues, specifically combating the actions that MCA companies utilize in making their collections efforts. In most cases, the MCA company will lay out their procedures and sneak their actions into the MCA agreement which admittingly, many small business owners never read. We have outlined several different actions that we have found which MCA companies put in their agreements that most small business owners never know about or understand the implications of.
Anti-Stacking Clauses
What is stacking? Stacking is when a client, usually coordinated by a Merchant Cash Advance broker (predator) takes more than one cash advance at the same time. However, it is arguable whether stacking occurs at the same time, or within a specific time frame. For instance, whether the MCA company does not know about the other advance what exactly is stacking? If the MCA company does not know if the client takes a MCA a month after theirs, then what is the difference?
MCA companies rightfully want to ensure to the best of their abilities that the business owner will pay their Merchant Cash Advance back to the MCA company. Stacking is not something that is smart for any business taking on an MCA as any person who can do math can understand that MCA companies spend time in estimating how much the client can pay them back and stacking destroys that concept.
With that said, many MCA companies slip in a clause in the MCA agreement which punishes you for stacking. Here is one which is a typical clause added in their agreement (Fox Capital Group).
Stacking Fee: For each occurrence, $5,000.00 or 10% of the balance of the undelivered Purchased Amount at the time of breach, whichever is greater, to be charged if Merchant has sold or sells any future receipts to, or has obtained or obtains a loan or advance secured by any future receipts from any person or entity without FCG’s prior written consent, due to increased risk prole.**
** Merchant acknowledges these fees as liquidated damages, and not as penalties, and reasonable estimates of the damages likely to be incurred by FCG in the event of Merchant’s breach of the Agreement.
Discount or Purchased Percentage is Not the Interest Rate.
MCA contracts usually have the percentage of the future receivables which the MCA company is purchasing from the small business owner. However, this percentage is commonly misinterpreted. In fact, we believe this is one of the most underhanded things that an MCA company does to the client.
Many small business owners see this percentage and they think that this is their interest rate. Remember, MCAs are not loans, and there is no interest. Instead, MCA companies should disclose what the factor rates are to the client, or the percentage which the payback is over the amount funded. We believe that this is an issue as many clients take on their debt without realizing that they are paying back funds much more than what the small business owners think they were taking.
Fees for originating and underwriting.
Nearly every MCA agreement has fees for origination and or underwriting. This may also be called a processing fee.
These fees are ridiculously high, and most of these funds usually go directly into the MCA company’s pockets. MCA companies do have staff which do the paperwork and procedures for arranging the advance for which there is overhead. However, most of these costs are minor and MCA companies are not employing business, most executives who are schooled in underwriting, etc.
Most MCA companies charge 5%-10% of the funded amount for origination. These fees can really grow as the MCA gets larger. For instance, on a $100,000 MCA $10,000 is 10% for origination. I can assure you that it does not cost $10K to deliver an MCA ever. Again, we are not arguing that there are no costs for delivery of an MCA. We are just saying that the fees charged are well more than what the actual work costs to deliver the MCA.
Fees that are not hidden.
There are other fees which are found in MCA agreements which can be scary. Below is a schedule of fees which can be found in Fenix Capital Funding’s MCA agreement.
Fenix has one of the most expensive fees list we have seen. There are several fees which are just exorbitant, and anyone should refuse to sign an agreement if these fees are within the agreement:
ACH Block on Account: $2,500
Default Fee: $7,500
Administration Fee: $6,500
3rd Party Restructuring Fee: $7,500
Additional Stacking Fee: 15% of Initial Purchase Price
Collections Fees: All fees for collections are paid by client
UCC liens
UCC liens are almost always in the MCA company’s playbook or collecting MCA debts. Regardless of what happens, every small business owner should have their MCA agreement reviewed by an attorney to fully understand the implications of the agreement.
Two types of UCC liens are filed by MCA companies.
1. UCC liens against specific collateral:
This type of lien gives creditors an interest in one or more specific, identified assets rather than an interest in all the assets owned by a business. These are most often used for inventory financing or equipment financing transactions.
2. UCC blanket liens:
This type of lien gives a creditor a security interest in all the borrower's assets. It’s commonly used for loans from banks and alternative lenders, as well as loans guaranteed by the Small Business Administration (SBA). Lenders prefer blanket liens because they’re secured by multiple assets and are, therefore, less risky. In some cases, a blanket lien might carve out some assets that will be exempt from the lien. This might occur if the remaining assets are more than sufficient to reimburse the lender, should a default occur.
Early Payback Addendums or Amendments
In some cases, MCA providers will allow clients to payback their MCA for a lower payback as long as it is within a specific time period. Brokers and MCA companies couch these “early paybacks” as a way to “save money” on their payback. However, MCAs do not carry any form of interest and the payback is still more than what it was. Further, payments may be continued without the business owner knowing it as MCA company’s ACH systems are not turned on a dime and take days or even weeks to change.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Master’s and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.
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